Tuesday, July 31, 2007

So which newspaper has the best business news? The New York Post, of course. In fact, the New York Post is the only New York newspaper that seems to have business news. Everybody else has analysis. Plus, they delight in covering the media, marketing and internet business in New York. No one else really does. Every morning I open to the business section of the Post with trepidation. I never know what I'm going to find. Anyhoo, just had to say that.

ValueClick's revenue from so-called lead generation business, which includes online sweepstakes, fell during the quarter after the Federal Trade Commission started investigating the practice in May, Chief Executive Officer TomVadnais said.

The FTC is investigating whether promises of free gifts violate U.S. laws.

I have no idea if this is what ValueClick said on their call. I didn't listen to it. But it's a perfect illustration of what is going on in the "so-called" lead generation business. (What's up with that "so-called"? Is Google a "so-called" cost per click business? Weird.)

Lead gen, if you're one of the thirteen people in the United States who hasn't heard my lead gen spiel yet, is the next step in the evolution of marketing from being push to being pull. I vaguely mentioned last week something about lower search costs changing the nature of marketing. One of the ways this is happening is that consumers are now paying more of the search cost and marketers are paying less.

Wait! It's not like that. It's like this: marketers pay the same average dollar amount per customer, but take less risk. The media get paid the same dollar amount by the marketer, take more risk, but make the consumer do some work. The consumer 'pays' more of the search cost by providing extra information about themselves in exchange for finding a product that better matches what they are looking for.

Am I being obtuse? Take Google as an example. Instead of running banner advertisements, they show cost-per-click ads. A marketer who buys a CPC ad on Google pays the same amount per sale as running a banner ad but takes less risk that his money will be wasted. An auto dealer could run a display ad at a $25 CPM and expect one out of every 20,000 people who see the ad to buy a car from him. Or, he could buy a click-through from Google for $10 and expect one out of every fifty people who click on it to buy a car from him. He takes less risk with the second option because he doesn't pay unless someone clicks and people who click are more likely to become customers. (In the real, inefficient, world right now, the dealer actually pays quite a bit less with the second option, and we'll get back to ValueClick with that fact later, I promise!)

The consumer provides information to Google by typing in "Honda dealer NJ new car", or something of the sort. The fact that the consumer is looking for a new car Honda dealer in New Jersey is valuable information and she is giving it to Google in exchange for information about these dealers. Google is, in turn, using this valuable information to put up CPC ads that point to New Jersey Honda dealers. By only getting paid if the consumer clicks through, Google is taking the risk that it will squander the consumer's valuable information and not get paid by an advertiser. (As an aside, it would be interesting to know how much Google is getting paid for taking that risk, consumer shouldering of search cost aside; does anyone know Google's overall effective CPM? I guess it shouldn't be hard to figure out. Knowing that would, if you believe in efficiency, put a dollar figure on the value of the consumer search.)

Lead gen is the next stage in the evolution of product-consumer matching from being a cost borne mainly by the marketer to being a cost borne mainly by the consumer. CPC is to CPM what Cost-per-Lead is to CPC: a further outsourcing of customer acquisition risk by marketers and a further increase in consumers trading information about themselves in order to find more appropriate products. This process is as inexorable as the move from CPM to CPC, from Doubleclick to Google. The next Google will be in lead generation.

But yesterday's news says it won't be ValueClick. The problem with outsourcing your marketing, or with outsourcing anything for that matter, is the familiar principal-agent problem. If you are paying someone to provide you with something that looks a certain way, they will provide you with that in the cheapest way possible, even if providing it cheaply strips all the value from it. For Google this looks like click-fraud. For lead gen it often looks like incentive marketing.

Ever see the ads for a free iPod or a free flat screen TV? (Maybe not so much anymore because of the above-mentioned FTC investigation.) You are promised a free iPod if you fill out a bunch of personal information. Next thing you know, you have a mortgage broker on the phone, trying to get you to refinance your mortgage. You've been sold as a mortgage lead.

You are a bad lead, obviously. Not because you aren't a real person or because you don't have a house to refinance (those would be pre-requisites for selling you as a mortgage lead) but because you have no intention of refinancing. A lead has to have both personal information and intentionality. If the person who filled out the lead form does not have the intention to purchase, then they are a bad lead. A company that entices low-intentionality people to fill out lead forms is selling poor quality leads. Lead buyers can figure out a given lead's quality on a lot of dimensions: is the person real, does the name match the address match the telephone number, if the lead becomes a customer then how much will that customer be worth, etc. But determining the intentionality of a given lead is very difficult.

That's why some lead generators sell low-intentionality leads: they are cheap to generate and indistinguishable from high-intentionality leads for a long time. An extension of Gresham's Law holds: bad leads drive out good. And because leads are fungible (a low-intentionality lead generator can sell his leads to another lead generator to be sold to a marketer) the industry has accrued many bad, or at least cynical, actors and the marketers can't weed them out.

Now, I'm not pointing fingers at anyone. I don't know ValueClick. But incentive marketing creates low intentionality, almost by definition. The mortgage broker calls and the prospect say "yeah, yeah, where's my iPod." One reason marketers pay less, on average, for a customer acquired through lead gen than through display advertising is that marketers don't trust lead generators to not screw them.

This is a problem the lead gen industry needs to solve before our Google can push the last Google into Doubleclick-like obscurity. Any takers?